The dollar is suffering from a recalibration of expectations for Fed rates.

29 mars 2023

The dollar fell again on Tuesday, undermined by the sudden change in currency traders' projections for US central bank monetary policy (the Fed) and a drop in bond yields.

Around 8:20 pm GMT, the greenback lost 0.43% against the euro, at $1.0845 for one euro. It also dropped 0.44% against the pound, at $1.2340 for one pound.

As a result of the banking crisis, traders have overturned their expectations and are now counting on an immediate halt to the Fed's monetary tightening cycle, followed by at least two quarter-point cuts by the end of the year.

"A month ago, the market thought the Fed was behind the curve on inflation" and saw it going very far, or even too far, in its tightening, recalls Marc Chandler of Bannockburn Global Forex. "Today, it thinks that it did not anticipate a recession enough" and sees it reducing its benchmark interest rate in the coming months to take account of the downturn.

Part of this recalibration is due to the wipeout that hit the banking sector and is likely to slow down credit allocation and also encourage the Fed to moderation.

This phenomenon caused US bond yields to plunge, making them less attractive to investors, which weighs on the dollar.

The "greenback," one of the nicknames for the dollar, is also suffering at the beginning of this week from a start of stabilisation in the financial system after two weeks of turmoil, according to Joe Manimbo of Oanda.

This calmer atmosphere has allowed several volatile currencies such as the Australian dollar, the Norwegian crown, the New Zealand dollar or the Canadian dollar to peek out.

However, currency traders are still hesitant to take strong positions, according to Marc Chandler, as they await a series of indicators on Thursday and Friday that should provide information on the trajectory of the economy and prices in Europe, the US, Japan and Chine